British American Tobacco PLC

1901–1911

Symbol: BATS (London), BTI (AMEX)

NAIC: 312229 Other Tobacco Product Manufacturing; 111910 Tobacco Farming; 551112 Offices of Other Holding Companies

British American Tobacco PLC is the second largest international tobacco holding company in the world. It sells 300 tobacco brands in 180 markets, has a 15% global market share, and manufactures and processes tobacco products in more than 66 nations.

Origins in Anglo-American Trade War

British American Tobacco originated from a compromise between two rival tobacco manufacturers: one American and one British. James Buchanan ("Buck") Duke, head of the highly successful American Tobacco Company, decided in 1901 to make a bid for the U.K. market. In response, several smaller independent British tobacco companies banded together to form the Imperial Tobacco Company Ltd. It was from these two tobacco companies that British American Tobacco was born.

Imperial Tobacco was able to resist American Tobacco's attempt to capture its native market but only after a prolonged trade war that proved expensive for both companies. After American Tobacco withdrew from the English marketplace, Imperial was in a stronger position and decided to press its advantage.

When Imperial started to make moves toward the American market, Chairman Duke saw the need for a compromise. A truce was called, and the two rival merchants agreed not to conduct business in each other's domestic markets. Each company also assigned brand rights to the other so that consumers who had grown accustomed to a given brand would not be lost. This deal also initiated the creation of a new company, British American Tobacco (BAT), of which American Tobacco owned two-thirds and Duke was the first chairman.

This new company, registered in London in 1902, acquired the recipes and trademarks of both originating companies. It also acquired all the export business and overseas production operations of each company. The new company's sales and growth potential seemed limited compared to the successes of Imperial and American. Nevertheless, the company grew slowly but steadily during the first decade of the century.

In 1911 the American government sued many U.S. tobacco companies in an early application of antitrust law. Both British American Tobacco and American Tobacco were among the defendants. On appeal, the Supreme Court ruled that much of the domestic tobacco industry engaged in illegal practices in restraint of trade. The Court sent the case back to a special four-judge panel appointed to hear the case in the first instance to devise a remedy. The panel's disposition of the case harmed neither of Duke's companies. In an arrangement approved by the panel, American Tobacco canceled most of its covenants with British American Tobacco and Imperial and sold all of its shares in British American. Most of the sold shares were bought by British investors, and subsequently British American Tobacco was listed on the London Stock Exchange.

It sells 300 tobacco brands in 180 markets, has a 15% global market share, and manufactures and processes tobacco products in more than 66 nations.

1902–1988

This left British American Tobacco, still chaired by Duke, able to sell its product independently all over the world, except in the United Kingdom where it was still bound by its covenant with Imperial. Imperial at this time also retained a one-third share of British American, but this did little to impair the company's success. Duke's operation began rapid expansion of British exports and overseas operations. Many new subsidiaries were established around the world during the brief period between the disentanglement from American Tobacco and World War I. Local sources of raw materials were discovered and developed, and international sales grew steadily.

The war brought large numbers of women into the company for the first time. The women were employed primarily in the distribution of cigarettes to the troops abroad, most of whom had switched to cigarettes from the less convenient pipe. The switch, although initiated by soldiers during wartime, caught on with civilians internationally, and British American began selling cigarettes in increasing numbers.

The end of the war brought even greater fortunes to British American Tobacco. Historically, no commercial enterprise had been able to penetrate the huge Chinese market beyond the coastal government trading stations. British American, under Duke's leadership, was able to exploit this untapped interior market, achieved record growth in the years immediately following this breakthrough, and maintained impressive sales levels throughout the rest of Duke's chairmanship. While chairman, Duke was the pioneer of British American's growth, the company's next chairman, Sir Hugo Cunliffe-Owen, was its pioneer of decentralization.

Decentralization and Growth: 1923-1962

Sir Hugo had been involved with British American Tobacco since its inception. Early involvement in the negotiations between American Tobacco and Imperial endeared him to Duke, who appointed Sir Hugo as director and secretary. Sir Hugo held those positions until Duke retired in 1923 (and died two years later) and then succeeded him as chairman. When Sir Hugo inherited the chair, British American's capitalization had quadrupled since 1902, and its sales had grown by nearly a factor of 40. By 1923 the company's world sales had grown to 50 billion cigarettes per year.

Sir Hugo visited China in 1923 to decentralize one of British American's biggest operations. Chinese cigarette consumption had grown from 0.3 trillion in 1902 to 25 trillion in 1920 and to nearly 40 trillion by the time of his visit. Sir Hugo's plan was to restructure BAT China Ltd. into independent regional units that could continue to operate if local conditions deteriorated. Sir Hugo also spent a great deal of time and energy over the next two decades lobbying the Chinese government to minimize the taxation of tobacco.

Sir Hugo's decentralizing efforts spread from China to many of British American's other international operations. The chairman felt that increased local autonomy would lead to better decisions and improved group performance. This proved true despite skepticism that too much decentralization could produce an unwieldy corporate structure. In 1927, British American had the resources to enter the U.S. market, monopolized at one time by American Tobacco. Sir Hugo acquired Brown and Williamson, a small tobacco producer in North Carolina. With British American's help, this modest company has grown to become a major cigarette manufacturer in the United States. This pattern of rapid growth from modest beginnings was maintained through the Depression and steadily through World War II. At the end of the war, in 1945, Sir Hugo stepped down from the chairmanship and became simply titular president of the company.

Without Sir Hugo's active participation, the management of British American did little other than maintain the company's steady growth through the late 1940s and 1950s. Profitability remained undiminished and the company successfully weathered the storm of the Communist Revolution in China, at which time all of BAT China Ltd.'s assets were nationalized.

Diversification: 1962-1988

1962–1988

By 1962, British American Tobacco's capitalization was such that it was able to begin major moves toward diversification. During that year, British American acquired minority interest in two companies, neither of which was involved in tobacco production or sales. Mardon Packaging International handled cigarette packaging and was thus a logical choice for acquisition. Wiggins Teape Ltd., on the other hand, was a large specialty paper manufacturer. Mardon was not highly successful at first. It was formed from five smaller packaging companies in cooperation with Imperial Tobacco and its first-year turnover was modest. It grew steadily, however, and by the end of the 1970s was advancing turnover at a rate of 15% per annum.

The success of these two enterprises, which later became wholly owned subsidiaries of British American Tobacco, paved the way for further and greater acquisitions. The groundwork was now laid for British American's transformation from a large tobacco company to an even larger conglomerate. While other major tobacco companies attempted to diversify into other packaged goods, British American wasted little time in moving into unrelated but profitable fields. During the 1960s and early 1970s, several major international fragrance and perfume houses were brought in to create a third segment of British American Tobacco's group. These companies included such internationally known concerns as Lentheric, Yardley, and Germaine Monteil.

Once these companies were thoroughly absorbed into British American's operations, the company turned its eye toward a West German department store chain called Horten. It first bought a minority share. Later it acquired the entire company. This led almost immediately to further department store chain acquisitions. Gimbels and Saks Fifth Avenue were acquired in the United States, Kohl's and Department Stores International in the United Kingdom, and Argos, the British catalog store, joined in 1979. Patrick Sheehy, before becoming British American's chairman, was involved in one more such acquisition. Marshall Field's department stores were the unwilling subject of a takeover bid conducted by the controversial team of Carl Icahn and Alan Clone. Sheehy was able to convince BAT to make a friendly bid for the chain and managed to prevent Icahn from succeeding.

Many of these investments gave British American a good deal of trouble at first, just as Mardon had previously. While Saks Fifth Avenue, which appealed to the upper-middle-class consumer, maintained high profitability, Gimbels, despite efforts to bring in wealthier clientele, has had a consistently poor showing. With the exception of Gimbels, the company absorbed and made a success of its retailing leg as well as its earlier expansion into paper.

In 1972 the treaty of Rome brought the United Kingdom into the European Economic Community (EEC) and terminated the agreements between British American Tobacco and Imperial Tobacco. New restraint of trade laws prohibited their arrangement. The companies exchanged brand rights once again, each retaining full ownership of its original brands in the United Kingdom and Western Europe only. British American kept its brand and trademark ownership in the rest of the world and in the duty-free trade outside Western Europe. Ties with Imperial Tobacco were finally severed in 1980 when that company sold its remaining few shares in BAT after having made major reductions over the preceding decade.

Due to the increasingly diversified nature of British American's interests, the name of the company was officially changed to BAT Industries Limited in 1976, and management was restructured for tighter control. BAT Industries became a holding company for several smaller operating companies organized according to industry. These operating companies in turn controlled the individual manufacturing and retailing enterprises.

Appleton Papers was added to the BAT operation in 1978. This American company established BAT as the world leader in the manufacture of carbonless paper. That year BAT also acquired Pegulan, a large home-improvements company in West Germany, as well as two fruit juice companies in Brazil. Other purchases followed in pulp production in Brazil and Portugal.

Within two years of his 1982 accession to BAT's chairmanship, Patrick Sheehy decided to add a fourth leg to BAT's existing three supports. Eagle Star, a British insurance group, was involved in an unfriendly takeover struggle with the West German firm Allianz when Sheehy contacted its chairman, Sir Denis Mountain, with a friendly proposal. Eagle Star, which had rejected a low bid from Allianz as "grossly inadequate," accepted a similar bid from BAT as Sir Denis felt the two companies could work together well. In fact, BAT Industries saw a 26 percent rise in pre-tax profit during the first half of 1987, 45 percent of which was due to Eagle Star. Hambro Life Assurance, another large British firm, became Allied Dunbar when it was acquired by BAT in 1985. In 1988, BAT expanded its financial services group into the United States, with the acquisition of the insurance enterprise, Farmer's Group Inc.

After the addition of financial services to BAT's portfolio, Sheehy implemented a policy of "focusing and reshaping the business" rather than continuing to move into new areas. Sheehy believed that BAT should only be involved in companies able to maintain a leadership position in their markets. This led to some significant divestitures for BAT. In 1984, British American Cosmetics, International Stores, and Kohl's Food Stores were all sold. Mardon Packaging was sold to its own management in 1985, and in 1986, Gimbels and Kohl's (U.S.) department stores were put up for sale. That year 88 Batus retail stores were also divested in the United States along with the West German Pegulan.

1982–2002

With the increasing uncertainty of a long-term market in tobacco, Sheehy also took steps to decrease BAT's dependence on that industry. In 1986, only 50 percent of BAT's pre-tax profit came from its tobacco group. This was down from 57 percent in 1985 and 71 percent in 1982. This change did not result from a decrease in tobacco sales, however, but to overall growth in the other groups, most notably Eagle Star, which increased its contribution to BAT's profits from 11 percent in 1985 to 19 percent in 1986.

Return to Tobacco: 1988-2002

In July 1988, Sir James Goldsmith brought BAT's diversification strategy into question. A British billionaire, who had previously participated in a number of leveraged buyouts of U.S. companies, Sir James launched a hostile takeover of BAT. He proposed a buyout financed entirely by debt. Of the $21 billion Sir James offered for the company, $6.4 billion would have been raised through high-yield junk bonds and the remainder by a consortium of banks assembled by Bankers Trust. Current BAT shareholders would receive no cash for their shares. They would instead receive shares of Sir James' investment company, Hoylake Investments, and bonds from the loans.

Sir James planned to pay the loans with the proceeds from selling BAT's non-tobacco holdings. Sir James' proposed buyout failed in May 1990, when California insurance regulators refused to approve his acquisition of the insurance company, Farmer's Group. Nevertheless, this attempted buyout caused BAT to begin to reconsider its diversification strategy.

In the United States and, to some extent in Europe, the 1990s were not good years for cigarette sales. The U.S. courts awarded multimillion-dollar verdicts to smokers who sued tobacco companies for severe illnesses that they claimed to be tobacco-related and to relatives of smokers who died from such illnesses. Governments at both the federal, state, and local levels discouraged smoking through such means as bans on advertising, bans on smoking in public places, the imposition of significant taxes on tobacco products, and other measures. These initiatives substantially reduced tobacco consumption in the United States and, to a lesser extent, in Europe.

From a worldwide perspective, however, demand for tobacco products remained strong. Asia comprised many tobacco customers and offered even more potential customers. The end of the Soviet Union's domination of the nations of Eastern Europe in 1989-1990 opened promising new markets for tobacco products. Thus, BAT was in a good position to move its business back to the exclusive sale of tobacco. The company began to do so in 1990 when it sold or spun off parts or all of numerous non-tobacco properties. These included Wiggins Teape Appleton, PLC; Breuners; Ivey; Marshall Field's; Saks Fifth Avenue; and 50 percent of Horten. In 1993 the company sold one of its financial properties, Eagle Star Levin N.V.

Using the cash proceeds from these sales, BAT began in 1994 to purchase numerous tobacco properties throughout the world. In that year, it acquired major interests in several Eastern European and Asian tobacco processors. It also bought 100 percent of American Tobacco. Between 1995 and 1997, BAT continued disposing of non-tobacco properties and acquiring tobacco properties throughout the world.

In 1998 the company spun off its remaining non-tobacco enterprises and consolidated its tobacco operations into the renamed British American Tobacco. At the time, CEO Martin Broughton expressed the company's determination to regain "world leadership in tobacco." This move was followed in 1999 by the acquisition of Rothman's, a significant player in tobacco markets in Asia and Africa. This purchase made British American second only to Philip Morris in global market share. In 2000, the company acquired Canada's dominant tobacco company, Imasco.

Thus, after spending about a third of the past century moving away from the tobacco business, British American Tobacco used the last decade of the century to position itself as the kind of tobacco company it was during its first decades of existence.